Definition of Contra account:
Liability account that reduces an associated account. For example, bond discount account that reduces the bonds payable account to arrive at the bonds carrying value.
Asset account that offsets an associated account. For example, accumulated depreciation account that reduces the original cost of an asset to arrive at its book value. Also called contra asset or valuation allowance.
A contra account is used in a general ledger to reduce the value of a related account when the two are netted together. A contra account's natural balance is the opposite of the associated account. If a debit is the natural balance recorded in the related account, the contra account records a credit.
Contra accounts are reported on the same financial statement as the associated account. For example, a contra account to accounts receivable is a contra asset account. This type of account could be called the allowance for doubtful accounts or bad debt reserve. The balance in the allowance for doubtful accounts represents the dollar amount of the current accounts receivable balance that is expected to be uncollectible. The amount is reported on the balance sheet in the asset section immediately below accounts receivable. The net of these two figures is typically reported on a third line.
Credit account that can be offset against another. For example, if two firms owe each other, they can settle the debt by making one payment to the one who is owed more.
How to use Contra account in a sentence?
- You may need to set up a contra account to offset an asset you have so that you still have some liquidity available,.
- A contra account is an account used in a general ledger to reduce the value of a related account.
- You may want to keep a separate contra account so that you have enough money to cover everything that you may need.
- Contra accounts are presented on the same financial statement as the associated account, typically appearing directly below it with a third line for the net amount.
- They are useful to preserve the historical value in a main account while presenting a decrease or write-down in a separate contra account that nets to the current book value.
- I did not want to open a contra account , because I already had an account and I did not want to keep track of another one.
Meaning of Contra account & Contra account Definition